QUESTION TWO [35]

Read the following article and answer the questions that follow:

Theres new life at Woolworths after David Jones

The retail group has a new lease of life after its ruinously expensive Australian experiment but theres no less pressure now to improve its clothing division and keep ahead in the food wars.

1 2 J A N U A R Y 2 0 2 3 A D E L E S H E V E L

The late December sale of David Jones must be a clear sign that the notion of a southern hemisphere retail champion, beloved of former Woolworths CEO Ian Moir who bought the illfated department store, is well and truly over. Announcing the sale three weeks ago, Roy Bagattini whos spent his entire tenure as CEO since 2020 fielding calls on what to do with David Jones said: Its increasingly difficult to create a so-called regional player with a level of impact and scale that can really materially shift your performance.

Signed in 2014, the deal was positioned as creating one of the 10 largest retailers in the southern hemisphere. It was also a fiendishly expensive all-cash offer on the part of Moir, who vastly outbid Australian rival retail chain Myer to secure David Jones. Moirs plan was to increase the private label portion of the David Jones merchandise and increase direct sourcing and improve systems to fatten profit margins. Unfortunately, it didnt work almost from the start. And where Woolworths paid R21.4bn for the experiment, it subsequently wrote down about two-thirds of the investment.

Market commentator Chris Gilmour says David Jones was quite big from a size perspective, but the trouble was it kept getting smaller and smaller as it withered away. Where the initial concept was that it was going to become a kind of conduit for Woolworths products in Australia, in much the same way Marks & Spencer had conduits in Europe, it was completely the opposite. Says Gilmour: They started mimicking David Jones in the Woolworths stores and started making Woolworths stores more like David Jones stores. Woolworths became more of a department store, to its detriment, and David Jones just stumbled along. No numbers were released with the sales announcement but according to The Sydney Morning Herald, industry sources expect the value of the deal to be between A$120m (R1.4bn) and A$150m (R1.75bn).

Bagattini said while the experience had been a painful one, the sale would allow for an overnight improvement in Woolworths return on capital by several percentage points. Its not as if Woolworths hasnt been chipping away at its David Jones problem for a while now. Under Bagattini, the company was focused on three priorities: restructuring its balance sheet; splitting its banking covenant arrangement between David Jones and the Country Road Group (which enabled it to bring back R1.5bn from David Jones to Woolworths in South Africa); and improving operational and financial performance.

Gilmour maintains a separate listing of Woolworths highly regarded food business should also be on the cards to unlock value, though Woolworths has dismissed this option. Hes worried that the food business is under attack from many quarters, though he adds Woolworths is head and shoulders above the competition when it comes to quality and its cold chain. Woolworths is world-class, as good as anything Marks & Spencer has to offer, if not better. The problem is its expensive and has alienated people. In a conference call at the end of last year, Bagattini said while the experience had been a painful one, the sale would allow for an overnight improvement in Woolworths return on capital by several percentage points.

It also means the group has more capacity to focus on its remaining Australian asset, the Country Road Group, which is expected to become a bigger part of the retailers life. While analysts have spent the better part of five years calling for David Jones to be sold, Woolworths group head of strategy and investor relations Jeanine Womersley says it was only now that David Jones is trading more profitably that it was the right time to sell.

Importantly, it also now enables the shift of both capital and management focus to other areas of the group, generating significantly higher returns on capital, and this opportunity cost has been a key factor in our consideration, says Womersley. Consider last weeks social media hubbub when Survivor South Africa presenter Nico Panagio tweeted his dismay at Woolworths unstoppable price hikes.

Womersley is awake to this and says: Admittedly, historically price has been a barrier to greater market penetration in some instances. Our investment of R1bn in price which we announced two years ago makes us more accessible while still being aspirational, and our investment into poultry has been a good example of this. Weve not only grown our market share in poultry within existing customers, but its brought in new customers who may have come in for our chicken but are now shopping into other categories too.

So what now?

With its balance sheet freed up, portfolio manager at 36One Asset Management Evan Walker says the South African business needs to make big investments in its online offering and loyalty programmes, where Woolworths is dramatically behind the curve of its competitors. Its loyalty programme is a mishmash of vouchers and offers to buy other stuff, he says, citing cashback offers such as those given by Clicks as superior. I think with Amazon coming, the online clothing offering will have to improve.

The David Jones sale didnt have much impact on Woolworths share price, but over two years the retailer has enjoyed an astounding rebound: its up 80% and now, at about R69, is just above its January 2018 levels. Gryphon Asset Management portfolio manager Casparus Treurnicht says news of the deal is already reflected in the share price.

What the sale will help with is to focus more of [Woolworths] energy on its remaining business, which was where it has slipped up hugely since the David Jones purchase.

Food is probably going to continue to suffer due to people trading down, but it is in a better position to get the fashion, beauty and home division aligned with the consumer. This will be something we need to monitor, but I have seen minor improvements already. https://www.businesslive.co.za/fm/money-and-investing/2023-01-12-theres-new-life-at-woolworths-afterdavid-jones/

Questions:

2.1 Undertake a SWOT analysis of Woolworths at the time of the writing of this article. (12)

2.2 So what now? Provide reasoned recommendations on how Woolworths should look ahead. (8)

2.3 Discuss strategic leadership as a concept and how Woolworths may benefit from the strategic leadership of Roy Bagattini. (15)